Dollar drops against Australia as growth across the Tasman beats forecast

The New Zealand fell against its Australian counterpart after stronger-than-expected economic growth across the Tasman reinforced speculation the Reserve Bank of Australia won't cut interest rates any further.

The kiwi fell to 91.98 Australian cents at 5pm in Wellington from 92.27 cents immediately before the release, and 92.65 cents yesterday. The local currency was little changed at 71.69 US cents from 71.73 cents at 8am and up from 71.13 cents yesterday.

The Australian dollar rallied after Bureau of Statistics data showed the nation's economy expanded a seasonally adjusted 0.9% in the first quarter. It is more than the 0.7% growth analysts were expecting. That came after the RBA yesterday kept the cash rate at a record low 2%, saying it would assess economic and fiscal data over the coming year to see whether the current stimulatory policy would stoke growth and inflation to meet the bank's targets.

"If you look at the interest rate outlook, it's still not 100% certain in both countries (New Zealand and Australia). You can't blame the market for second-guessing itself on which way the RBA and RBNZ (Reserve Bank of New Zealand) will move," Alex Hill, head of corporate foreign exchange at NZForex in Auckland, says.  "The Kiwi/Aussie is reconfiguring itself, as it should do. Those levels up at 99 (NZ cents to $A1) were just never going to last."

Dairy prices at Fonterra Cooperative Group's GlobalDairyTrade auction unexpectedly fell to their lowest level in almost six years, while ANZ Bank New Zealand's commodity prices index showed prices for New Zealand's raw materials dropped 4.1% in May on weaker dairy prices and a decline in meat prices.

Traders are watching New Zealand's central bank policy review next week and have priced in a 46% chance of a cut, according to the Overnight Index Swap curve.

Hill says he doesn't expect the RBNZ to cut at next week's meeting, with the decline in the currency and looming introduction of new macro-prudential tools to cool the Auckland property market likely to stay governor Graeme Wheeler's hand until he sees more data.

New Zealand's two-year swap rate fell to 3.29% at 5pm in Wellington from 3.33% yesterday, and the 10-year swap rate increased to 3.9325% from 3.88%.

The kiwi fell to 64.21 euro cents from 65.04 cents yesterday as the prospect of Greece reaching an agreement with the International Monetary Fund over a looming repayment gathers momentum, and ahead of the European Central Bank's regular monetary policy review.

The local currency was little changed at 46.69 British pence from 46.76 pence yesterday and climbed to 4.4429 Chinese yuan from 4.4099 yuan. It advanced to 88.82 yen from 88.65 yen yesterday. The trade-weighted index was little changed at 74.77 from 74.68 yesterday.

(BusinessDesk)